Scribd
Upload
142 views3 pages

Risk and Return C - Practice Exercises

This document contains 5 practice problems related to risk and return. Problem 1 asks the learner to calculate the beta and expected return of a portfolio containing 2 stocks and T-Bills. Problem 2 asks the learner to calculate the expected return and standard deviation of a portfolio containing 2 risky stocks and T-Bills. Problem 3 asks the learner to calculate the beta of a stock and how the beta would change given changes to the stock's standard deviation and correlation. Problems 4 and 5 ask the learner to use the security market line and CAPM model to evaluate if stocks are priced correctly and calculate expected returns and required dividend payments.

Uploaded by

milotikyu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
142 views3 pages

Risk and Return C - Practice Exercises

This document contains 5 practice problems related to risk and return. Problem 1 asks the learner to calculate the beta and expected return of a portfolio containing 2 stocks and T-Bills. Problem 2 asks the learner to calculate the expected return and standard deviation of a portfolio containing 2 risky stocks and T-Bills. Problem 3 asks the learner to calculate the beta of a stock and how the beta would change given changes to the stock's standard deviation and correlation. Problems 4 and 5 ask the learner to use the security market line and CAPM model to evaluate if stocks are priced correctly and calculate expected returns and required dividend payments.

Uploaded by

milotikyu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Practice Problem Set #11: Risk and Return III

Theoretical and conceptual questions:


(see notes or textbook for solutions)

1. How do we measure systematic risk?


2. Explain why the expected return of a risky asset does not always depend on the total
risk of the asset.
3. What is the beta of the market? The risk free asset? A portfolio?
4. Is it possible for stocks or assets to have a negative beta? A zero beta?
5. What is CAPM and what is the security market line?
6. Differentiate between the Capital Market Line and the Security Market Line.

Practice Problems:
1. Suppose you hold the following amounts in your portfolio:

Stock Value β
Sonic Youth Corp. (SYC) $10,000 0.60
Paul's Replacements (PR) $10,000 1.50
T-Bills -$5,000 ?

(a) What is the Beta of your portfolio?

(b) If rf is 5% and E(RM) is 15%, what is the expected return on this portfolio?

2. Suppose you invest $100 in two risky stocks (A,B) and T-Bills (F). You put $60 in
A, $20 in B and $20 in F. You are given the following information:

σA=11%, σB=15%, β A=0.90, β B=1.20, 𝜌𝜌 AB =0.30


The expected return on the market portfolio, 𝐸𝐸(𝑅𝑅𝑀𝑀 ) , is 12%, with a standard
deviation, 𝜎𝜎𝑀𝑀 , of 8%. The return on T-Bills is 6%.

(a) What is the expected return and standard deviation of your portfolio?

3. The market portfolio has an expected return of 15% and a standard deviation of
20%. The standard deviation of DHH Beer is 25% and its correlation with the
market is +0.50.
(a) What is the beta of DHH Beer?

(b) What would happen to DHH Beer's beta if its standard deviation were 40%
and its correlation with the market were to remain at +0.5? What if the
correlation coefficient were +0.60 and the standard deviation of DHH were
25%?
4. The expected return on the market portfolio is 12% and the risk-free rate is 4%.

(a) Draw the Security Market Line.

(b) Suppose stock A has an expected return of 11% and a β of 0.75. Is A priced
correctly according to the CAPM? If it isn't, what would you do?

(c) Suppose stock B has an expected return of 15% and a β of 1.50. Is B priced
correctly according to the CAPM? If it isn't what would you do?

5. A stock is currently selling for $10 and has a beta of 1.6. The risk-free rate is 4%
over the next year and the market risk premium, E(RM) - rf, is 10%.

(a) What is the stock's expected return?

(b) If the stock price is to remain unchanged over the next year, what must
dividend payments be on this stock?

You might also like